One of the most recent mantras in the financial media is that housing prices rise because there is an inventory shortage. While it is an excellent headline for “getting clicks,” the are 3-reasons why there really is NO housing shortage.
A Quick Story
In 2007, as the housing market was going crazy, I lived in a quiet, gated community. I had no intention of selling my house. However, one day, a knock came at my door from a realtor who had a client willing to pay me much more than I ever imagined for the house.
I sold the next day.
Then, In October of 2008, I bought a house from a distressed seller relocated back to England. It was the “perfect” house, next to a prime school my kids could walk to, and extremely convenient to everything. It was my “forever” house.
In 2015, I received a knock at my door from a realtor representing a client moving from Montana to work for an oil and gas company. I guess he was “The Godfather” because he “made me an offer I could not refuse.”
I sold the next day.
The moral of the story is that “supply” is only a function of “price.” My homes were never “part” of the calculated inventory because they were never listed. However, they did become part of the “supply” when the “demand” fostered the right price.
Everyone will sell at a certain price. Supply is never a problem as long as prices rise and mortgage rates are accommodative.
However, therein lies “the rest of the story.”
The Myth Of A Supply Problem
The “inventory shortage” argument comes from the following chart: the “months of supply” of homes. At just 3-months of supply, you can understand why the media believes there is a shortage. However, that is NOT what the chart is detailing.
The chart only tells us that if NO more homes come to market at the current transaction rate, all homes currently for sale will get sold in 3-months. Such also assumes the current demand for homes remains the same.
Now, take a look at 2005.
The same “housing shortage” story existed then. Almost overnight, the real estate market went from a shortage of inventory to excess.
Were a massive number of homes built almost overnight? Of course not.
So what happened?